Precautionary saving under liquidity constraints: evidence from Italy

I empirically investigate precautionary savings under liquidity constraints in Italy using a unique indicator of subjective variance of income growth to measure the strength of the precautionary motive for saving, and a variety of survey-based indicators of liquidity constraints. The main contribution of the paper is twofold. First of all, I attempt to differentiate between the standard precautionary saving caused by uncertainty from the one due to liquidity constraints using an endogenous switching regression approach, which allows me to cope with endogeneity issues associated with sample splitting techniques. Second, I move one step further with respect to previous studies on consumption behaviour by taking explicitly expected liquidity constraints into account. I eventually found the precautionary motive for savings to be stronger for those households who face binding constraints, or expect constraints to be binding in the future. Indeed, a complementarity relation exists between precautionary savings and liquidity constraints.